Credit ratings and premiums in mergers and acquisitions: a re-examination of evidence

Abstract

Mergers and acquisitions (M&A) are among the most consequential and risk-intensive strategic decisions firms undertake. A central financial element of these transactions is the acquisition premium—the amount paid above a target’s market value—reflecting expected synergies and competitive bidding. Understanding why acquisition premia vary has long attracted academic interest. Prior research identifies both firm-level determinants (e.g., size, leverage, profitability) and deal-level characteristics (e.g., payment method, competition, relatedness, hostility). More recent studies emphasize informational and institutional factors, particularly the role of credit ratings. Credit ratings issued by agencies such as Moody’s, S&P, and Fitch influence firms’ cost of capital, investor perceptions, and access to financing, suggesting they may also affect M&A pricing. Ratings can reduce information asymmetry and impose governance constraints on acquirers, potentially limiting aggressive bidding. However, empirical evidence on their impact on acquisition premia remains mixed. A key challenge is endogeneity, as rated firms differ systematically from unrated firms in ways that also affect premia. To address this issue, this study applies a two-step selection model following Jory, Ngo, and Wang (2016). A first-stage probit estimates the likelihood of a firm being rated, and the resulting inverse Mills ratio is included in a second-stage regression explaining acquisition premia. Using a newly constructed dataset of M&A transactions from 2013–2023, the study revisits the rating–premium relationship in a more recent regulatory and informational environment. The results reveal a negative and statistically significant relationship between acquirer rating status and acquisition premia, even after correcting for selection bias. In contrast, target rating status shows no significant effect. These findings suggest that credit ratings primarily constrain bidder behavior rather than influence target valuation. The study contributes to the literature by updating prior evidence and highlighting the continued relevance of ratings in modern M&A markets.